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Stocks: Prior day: Asia, Europe down, US up. Today: Asia up, Europe down. Risk rally that began Friday fizzles with the apparent stoppage of central bank support for the Euro, though expectations that China will cease tightening in response to a weak Euro and EU have sent most Asian markets higher
- US Bonds: With the rise in risk appetite in the US Friday, Treasuries fell under a bout of stiff selling that swung the yield on the benchmark 10-year Note from a multi-month low near 3.10%, down from 3.20% at the prior close.
- FX: Overall bias to safety currencies [JPY, USD, CHF in order of safety
appeal] vs. risk currencies [AUD, NZD, CAD, EUR, GB in order of risk appetite
appeal], mostly according to a currency’s place on the risk spectrum, with the JPY among the strongest and commodity dollars weak except for the CAD (as higher inflation figures raise interest rate increase expectations) and the EUR, which is weakest of all now that central bank intervention appears to have stopped.
- Main events: MON: USD Existing Home Sales, Consumer Confidence TUES: NZD Inflation expectations q/q, GBP Revised GDP, WED: USD Fed Chairman Bernanke Speaks, Core Durable Goods, New Home Sales GBP Nationwide HPI, THUR: AUD Private Cap. Expenditure q/q, GBP CBI Realized Sales, USD Prelim GDP, Unemployment FRI: CHF KOF Economic Barometer
Big Theme: Risk Appetite Off again? Virtually all risk assets in retreat, as Friday’s risk rally fizzles fast as central bank for the EUR ceases, stops EUR shorts unwinding. Everyone knew the risk rally was a short term technical bounce, and perhaps that expectation killed it along with the stoppage in EUR support from central bank(s). Expect the EUR and other risk assets to retest support levels UNLESS we get some serious news on the stabilization of the EU crisis, possibly in the wake of US Treasury Secretary Geithner’s trip to the UK and Germany.
US: Down- The passage of banking legislation in the US Senate relieved some uncertainty for the financial sector, which led a rally for the first positive close for US stocks since Monday, after the German ban on short sales scared markets into losses for the following days. The U.S. Senate approved a sweeping regulatory overhaul of Wall Street firms that analysts said appeared less onerous than many had feared
However, Friday’s gains merely reduced some of the week’s bloodshed.For the week: Dow -4%, S&P -4.2%, Nasdaq -5%.
Trading volume surged as a result of the stock market's swings and the expiration of monthly options. In turn, roughly 2.3 billion shares exchanged hands on the NYSE this session. That's nearly double the 200-day average of 1.2 billion shares for the Big Board.
US Bonds: Reflecting continued fear in the markets, the Ten-year Treasuries edged up around 4/32 in price to yield 3.222 percent, down roughly 2 basis points from late U.S. trading on Friday. The 10-year yield has slid more than 40 basis points so far in May, and is on track for its biggest one-month decline since December 2008
Asia Stock Outlook: Up at the close Monday. The Nikkei was the only major Asian index to close lower on fears of further declines. Most others rose strongly, particularly in China. The MSCI index of Asia-Pacific shares outside of Japan rose 1.4 percent after a weaker start, moving up from the lowest level since September 2009.
The Shanghai Composite Index .SSEC gained 3.6 %, on a surge in property shares after a media report quoted a government official as saying a new property tax recently under discussion would not come within the next three years.
Markets now believe that the turmoil caused by the European sovereign debt crisis will force Chinese monetary policy makers to become more accommodative in order to maintain growth in H2 of 2010 given the likely slowdown in growth in Europe - China’s largest export market. However few believe this is anything more than a technical bounce for Asian stocks.
European Stock Outlook: Down – European shares opened lower Monday European shares briefly turned flat in morning trade on Monday, as Spanish banking stocks reversed early gains on concerns about the impact Bank of Spain's bailout of CajaSur, offsetting gains in mining stocks.
Commodities Outlook Friday and early Monday trade GMT: Mixed- Energy steady, remains in downtrend. Gold higher, remains firmly in uptrend.Shanghai copper rose more than 2 percent, tracking gains in London copper the previous session, as traders expect the market to stabilize this week in the absence of further bad news from the euro zone.
Crude Oil Daily Outlook: Down- On Fridayenergy commodities failed to reverse their downward trend, managing only a slight gain Friday after Thursday’s plunge from $73 to about $70, ending the week just above $70.
Oil at $65 per barrel is still reasonable for all producers, but a price below that will be a "disadvantage", the chief executive of Saudi Basic Industries said on Sunday.
Gold Daily Outlook: Up- Futures higher both Friday and thus far in early Monday Asian and European trade as central bank EUR buying abated and concerns about the global economy and value of the EUR remain firmly in place, with gold up from Thursdays close around $1170 to $1185.
With no near term inflation threat and a rising USD, gold’s short term prospects appear largely tied to anxiety about the value of the EUR, which is widely believed to have lots more downside ahead as all the fundamental weaknesses driving it lower, particularly relative to the USD, remain in place for now. Thus more EUR weakness is likely to support gold even as the USD strengthens. Both are moving in the opposite direction of the Euro. See The Must Know Truth About Gold for more on how to understand Gold’s likely moves.
Thus if there is renewed central bank intervention to prop up the EUR, expect gold and the USD to pull back.
Thus, any anticipation of coordinated intervention to support the EUR may transition a decline in GOLD/EUR into GOLD/(other currencies), which eventually allows the yellow metal to join the selloff in silver, oil and gas.
We suspect support in the $1160-$1200 will continue unless there is new EUR weakness or strength. Next support zone is at the 200 day SMA around $1,120.
FOREX Daily Outlook: In Monday and early Tuesday trade GMT: Overall bias to safety currencies as risk assets retreat in mid- Monday trade with some exceptions: EUR weakest as central bank intervention ceases and the Euro resumes its move down to retest recent support. If so, expect the USD and Gold to strengthen. CAD among strongest due to last week’s high inflation figures which raise already high interest rate increase expectations for it.
US Dollar Daily Outlook: Up vs. the EUR, JPY, CHF slightly down vs. the AUD, CAD, NZD, down vs. the GBP. USD generally strengthening, cutting losses as European trade progresses and the EUR weakens on continued anxiety about the EU debt crisis and a stop in central bank intervention to prop up the EUR, which pushes the USD lower.
Longer term likely EUR weakness will be a major support for the USD, which also enjoys somewhat better underlying fundamentals of the US economy and no comparable threat of political disintegration like that of the EU.
Credit Default Spreads have widened recently, markets price in a roughly 75% chance that Greece defaults within the coming 5 years.
Euro Daily Outlook: Down vs. all since Friday, and the downtrend is accelerating in early European trade Monday, as central bank intervention appears to have finished. With no improvement in the EUR’s underlying fundamental weaknesses, we expect the EUR to head back down to test recent support around 1.2200 -1.200 near term. It has already broken 1.2400 support thus far today after hitting 1.2600 Friday.
The Euro rebounded sharply last week against all majors on suspected central bank intervention
Yen Daily Outlook: Down vs. the USD, up vs. the EUR, GBP, CHF, AUD, little changed since Friday vs. the CAD, NZD but gaining on these Monday. Benefitting as risk aversion returns Monday, no doubt to the disappointment of Tokyo, which has voiced discomfort with JPY gains since the EU crisis began sparking risk aversion over the past weeks.
British Pound Daily Outlook: Up vs. the EUR, USD, AUD, CHF, NZD, down vs. the JPY, CAD. Giving back gains, losing strength in early European trading Monday.
Australian Dollar Daily Outlook: Up vs. the USD, EUR, CHF (strongly) down vs. the JPY, GBP, NZD, CAD. The AUD is losing strength in early Monday trade as part of an overall retreat in risk appetite from Friday’s bounce. Losses in the Australian dollar deepened after Rio Tinto said a mining tax had damaged Australia's investment reputation. The currency bounced back from its lows as stocks in China, with which Australia has close trade ties, rose 3 percent
New Zealand Dollar Daily Outlook: Up vs. the USD, EUR, CHF, AUD, steady vs. the JPY, down vs. the GBP, CAD.
Canadian Dollar Daily Outlook: Steady vs. the JPY, up vs. all others
Swiss Franc Daily Outlook: Down vs. most except the EUR
CONCLUSIONS & Big Picture: After Friday’s rally and hopes for a risk asset bounce, risk aversion returns as central bank intervention (either from the SNB, ECB, Chinese, or a combination of these and others) appears to have stopped, prevailing risk aversion and related downtrends for risk assets returns.
Expect more attempts to calm markets about the EU crisis in the wake of US Treasury Secretary Geithner’s trip to the UK, Germany, and China. These will likely be about a coordinated effort to address the liquidity issue in Europe. Meanwhile, there is broad consensus that even the latest massive EU/IMF rescue plan is nothing but an attempt to buy time while EU and world leaders figure out how to minimize the damage to both their economies and political careers.
It’s a typical light end of month economic calendar this week, but the US has important employment, consumer confidence, durable goods, preliminary GDP. In addition to their own importance, these will be used to help set expectations for next week’s climactic monthly US jobs figures.
DISCLOSURE AND DISCLAIMER: OPINIONS EXPRESSED ARE NOT NECESSARILY THOSE OF AVAFX, AUTHOR HAS NO POSITIONS IN ABOVE INSTRUMENTS.